What It Takes To Start A Hedge Fund Has Completely Changed Over The Last Decade

If you think you're going to be like Ray Dalio or Dan Loeb, starting an incredible
hedge fund from your apartment, it's time to let go of that
dream.

Over the last ten years, starting your own fund has gotten way
more complicated than it used to be.

Gone are the days when a guy with a Bloomberg machine could convince investors to
fork over that 2% and 20% (the common hedge fund compensation
scheme) because of their investment thesis or their trading
prowess.

"You're looking for a team more than a player," said Jason Ader,
founder and CEO of alternative asset manager Ader Investments.
"It used to be a Kobe Bryant or a Lebron James could start a
fund by just being who they were."

Now what you really need is a team — you need all of the Lakers.
Plus Phil Jackson. And tons of support staff.

What's happened is that the industry has gotten so crowded that
now there's sort of a template for the hedge fund business plan,
so seeders have to be really careful and really get through the
noise before they give their money to anyone.

On top of that, increased regulatory scrutiny means that the less
sexy parts of the business are more vital than ever.

Being a excellent at trading is great, but that skill can be
learned or outsourced to a firm like Cantor Fitzgerald, Ader told
us. Now, having that talent is less interesting to seeders than
the skill of your hedge fund's number crunchers.

"You need a good compliance officer who has the ability to be
independent and to supervise. There are some pretty high profile
personalities... that start a fund and it's critical that they
hire someone who can think independently."

And your compliance officer needs a third party checking their
work as well.

This is on top of all the other things seeders want to see from a
hedge fund start-up — things like a significant chunk of money
from general partners so they have skin in the game, great
research, investing talent (which is hard to come by), and
creative ideas.

"Often very talented investors don't know what they don't know
about the operational side of the business," said Don Rogers the
founder and managing partner of boutique seeding firm Stride
Capital. His firm specializes in hand-picking one, two, or three
investments a year that it really believes in and helping those
hedge fund managers with the operational side of the business.

"Many firms that fail, fail because of operational issues as
opposed to investment issues, and the two are kind of
correlated," said Rogers.

Rogers gets 10-20 leads on managers a week from investors, other
managers etc. — it's really an active dialogue with the Street.

"We are the team that is out spending exceptional, unique talent,
ensuring that the operational side of the business is there and
helping teams execute by being engaged with them... there's a lot
of copy catting out there a lot of unoriginality out there... the
mean is becoming a true average."

So if you want to start your own fund, try to stand out... and
start making draft picks for your team.